DMS Posts

The big IR35 consultation

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HMRC has published its keenly awaited consultation on the future of IR35. Radical changes are ahead for some freelancers and those who hire them. How could you be affected?

Consultation. On 18 May 2018 HMRC published its long-awaited consultation on the future of IR35 (see link below) . This makes clear that the public sector rules which were introduced in April 2017 will be extended to the private sector, but probably with a few minor changes.

Public bodies. The April 2017 changes shifted responsibility to public bodies for deciding if freelance contractors they use are caught by IR35 , rather than it being a question for those doing the work. Faced with fines for getting it wrong, many public bodies have either assumed IR35 applies or changed their working practices by not hiring freelancers.

Fine tuning. Naturally, HMRC is very happy with the 2017 changes and wants to see them rolled out to the private sector. However, there are shortcomings in the public sector model which even HMRC recognises. Therefore, much of the consultation is devoted to asking for suggestions on how it can be improved before being rolled out.

No change. Importantly, the consultation says that the rules for determining if IR35applies won’t be changed. This will still depend on whether the person doing the work would be self-employed if they worked for the client directly, i.e. not through their company or partnership.

When and how? Our guess is that the changes resulting from the consultation won’t take effect until April 2020. But if you want to have your say on how they take shape, you have until 18 August 2018 to submit your comments. Tip. If you use freelancers who work through a company or partnership, use the time before any new rules are implemented to review the contracts and terms of work to ensure that IR35 won’t apply. Loosening the level of control you have over the workers and how they do their job will be key to this.

The question of whether IR35 applies will be shifted from the worker to the hirer as is currently the case for public bodies. This will probably happen in 2020.
DMS Posts

Cash basis – decision time for some landlords

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As a landlord you might need to make extra calculations when completing your 2017/18 tax return because of the new basis for working out profit. What sort of adjustments are required and is there a way to avoid having to make them?

Yet more new rules

The tax position for landlords has become more complex and tough in the last few years. One change which, we suspect, many will have overlooked is the imposition of the cash basis for working out profits for 2017/18 and subsequent years. This affects most landlords who are individuals, but not those who are companies, limited liability partnerships or trusts. It applies to commercial and residential lets.

When does the cash basis apply?

The cash basis automatically applies to individuals who receive rents (before expenses) of £150,000 or less per year. This is the reverse of the rules which applied prior to 2017/18. Until then, as a landlord you were required to work out your profits using normal accounting rules. The transition from one basis to the other requires special adjustments.

Tip. You can elect for the cash basis not to apply. This will avoid having to make the adjustments that are required because of the change (see The next step ).

Cash basis v normal accounting rules

As the name suggests, the cash basis means that you work out your profit taking account of rents etc. you’ve received and expenses you have paid. Profit using the normal accounting rules is worked out on rent receivable by you and expenses payable. So, as a rule of thumb, if your tenants are often in arrears with rent while you pay your bills on time, the cash basis will work well for you. But if the circumstances are reversed then the normal accounting basis is probably your best option.

Trap. If you elect to use the normal basis, it only applies for one year. If you want to continue on the same basis you must make an annual election.

Example. Jim lets out a shop for £2,000 per month payable in advance on the first of every month. When he prepares his 2017/18 tax return Jim must ensure the correct rents and expenses are reported. The £2,000 rent he received for April 2017 didn’t show in his accounts for 2016/17 because it related (except for a few days) to 2017/18. But because he received it on 1 April 2017, it won’t show in his cash basis accounts for 2017/18. Jim must make an adjustment by adding the £2,000 rent received on 1 April 2017 to what he receives in 2017/18. He might need to make similar adjustments for expenses he pays in advance, e.g. service charges, or he’ll miss out on tax deductions.

Other adjustments

Other adjustments might be required as a result of the switch to the cash basis. The most significant of these is for expenditure on equipment etc., which would have qualified for capital allowances under the normal rules, and interest on loans. The amount of tax relief for these can be permanently lost or gained; it’s not just the timing (see The next step ).

Tip. When completing your 2017/18 tax return review the adjustments required. You can then decide if you would be better off electing to stick with the normal basis.

For 2017/18, individuals who are landlords and receive rents of no more than £150,000 per year must work out their profit using the cash basis, i.e. income received minus expenses paid. Transition adjustments are required to avoid double accounting. You can elect to continue with normal accounting rules.
DMS Posts

MTD development on a go-slow

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HMRC’s CEO has announced that the MTD process for individuals is slowing down to free up resources for work on Brexit. How might this affect you?

No change, almost. According to HMRC’s CEO, the go-slow “means halting progress on simple assessment and real time tax code changes” . He added that this doesn’t mean no changes at all. Anything that frees resources for other work, namely Brexit, will go ahead, but no details of what this might involve were given.

New. Simple assessments were supposed to play a big part in Making Tax Digital (MTD), and HMRC’s initial claim was that it would be a “New way of collecting tax that will make life easier for millions of customers” within self-assessment. However, so far HMRC has only used them sparingly and so you’re unlikely to notice any change because of the go-slow. In practice, this probably means that if you’re currently within self-assessment you’ll remain in it for a while longer.

Tax codes. The slowdown may have a more noticeable effect on HMRC’s dynamic coding. This was supposed to collect underpayments of tax which built up because of incorrect tax codes, by making in-year adjustments, but the system has struggled to cope. While HMRC hasn’t given any clues about exactly what will happen now, our guess is that there will be fewer dynamic coding changes. So if you want to avoid or reduce under or over-paying tax through PAYE, the onus will be on you to tell HMRC as soon as possible about changes which might affect your code number, e.g. starting to receive benefits in kind.

Tax credits and child benefit. Since no new tax credits claims can be made after January 2019, HMRC doesn’t intend to proceed with an online service for such claims. Instead it will focus on the beleaguered Tax-Free Childcare. There will be no significant changes to the existing child benefit system.

What about businesses? MTD for VAT is still on course for April 2019. And while HMRC admits that the introduction of a single online account for businesses will be delayed, there’s no suggestion that the April 2020 date for MTD for business will be put back… watch this space!

The go-slow will probably mean that if you’re in self-assessment you’ll remain so rather than receiving simplified assessments instead. Improvements to the tax coding system are also on hold.
DMS Posts

National Minimum Wage and National Living Wage rates

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The hourly rate for the minimum wage depends on your age and whether you’re an apprentice.

You must be at least:

– school leaving age to get the National Minimum Wage
– aged 25 to get the National Living Wage – the minimum wage
will still apply for workers aged 24 and under

Current rates

These rates are for the National Living Wage and the National Minimum Wage. The rates change every April.

Year 25 and over      21 to 24         18 to 20      Under 18 Apprentice
April 2017
(current)                                    £7.50                     £7.05              £5.60          £4.05           £3.50
April 2018                                  £7.83                    £7.38               £5.90          £4.20           £3.70

 

Apprentices

Apprentices are entitled to the apprentice rate if they’re either:

– aged under 19
– aged 19 or over and in the first year of their apprenticeship

Example
An apprentice aged 22 in the first year of their apprenticeship is entitled to a minimum hourly rate of £3.50

Apprentices are entitled to the minimum wage for their age if they both:

– are aged 19 or over
– have completed the first year of their apprenticeship

Example
An apprentice aged 22 who has completed the first year of their apprenticeship is entitled to a minimum hourly rate of £7.05

 

DMS Posts

Draft regulations to enable MTD for VAT

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Draft regulations to enable MTD for VAT reporting expose the muddled thinking behind the digitally linking of accounting software and spreadsheets.
Timing

Draft VAT regulations, and a notice to require taxpayers to comply with MTD reporting, were released for consultation on 18 December 2017, with a deadline for commenting set at 9 February 2018. This consultation period fits neatly over the busiest period for accountants and tax advisers, thus reducing the likelihood of detailed feedback from those who will be at the sharp end of the MTD regime, but I’m sure that is just a coincidence.

Digital records

What HMRC calls “functional compatible software” must be used record and preserve prescribed VAT related data (see below). That software must be used to calculate the VAT due, report the VAT figures (as per the current VAT return) to HMRC via an API, and to receive information back from HMRC.
The VAT related data includes: for each sale and purchase the business; the time of the supply, value and rate of VAT charged, or in the case of purchases, the amount of input VAT allowed. There is no requirement in the draft regulations that the electronic recording of this data must be done at the time the supply is made, or when the purchase is received. As long as the data is recorded electronically by the earlier of the date that the VAT return must be submitted, or is actually submitted, this will be sufficient (reg 32A para 8).

Mix and match

The business can use more than one piece of software to keep its digital records, but those separate software programmes must be “digitally linked”. HMRC provides three examples in the draft notice of what it means by digitally linked:
1. The business records transactions in accounting software (A), transfers the totals to spreadsheet (B) where adjustments are made for say partial exemption, then it uses another software package (C) to transfer the totals to HMRC. The transfer of data between A, B and C must all be done digitally.
2. The business uses accounting software to record all its transactions and to submit the VAT return. However, it uses a spreadsheet to work out the VAT adjustment on road fuel scale charges. That adjustment is manually typed into the main accounting package as a journal entry. As the road fuel adjustments are not part of the records which are prescribed to be kept digitally, the manual journal entry is permitted and the business is compliant with the MTD regulations.
3. A VAT group uses three different accounting packages (A1, A2, A3) for different companies in the group. The totals are collected in a spreadsheet (B) to create the VAT figures needed for the group VAT return. Spreadsheet B is then digitally linked to another software package (C) which is used to submit the group VAT return to HMRC. As long as software family A is digitally linked to B, which is also digitally linked to C, the requirements of the MTD regulations are met.

 

The digital linking of the accounting software to other submission software or to any spreadsheets used will apparently be a legal requirement, but the definition of exactly what digital linking means isn’t included in the draft VAT regulations currently out for consultation.

The reasoning behind digital linking is to avoid errors being introduced by human hand, but as it will be acceptable to make manual journal adjustments, and to perform manual calculations on spreadsheets as part of the process, the logic behind the digital linking falls completely flat.

It is clear from the slide pack provided with the draft regulations, the taxpayer will be permitted to record his transactions in a spreadsheet and transmit that spreadsheet by email or even on a USB stick to his tax agent. The agent then imports the data electronically from the spreadsheet into his own accounting software which is used to submit the figures to HMRC.
What remains the same

The VAT reporting dates won’t be changed. Businesses will report their VAT information by the same deadlines and for the same VAT quarters as they do currently. There will be no requirement to change VAT quarters to align with the accounting period or tax year, if those quarters do not already align.
The data provided to HMRC will be exactly the same as the totals currently submitted in the nine boxes of the VAT return. No additional information to back-up those totals will be required, but businesses will have the option to voluntarily submit supplementary data, such as the split of sales between different rates of VAT.

Exemptions

A business may be exempt from MTD reporting on any of the following grounds:
• Its turnover for the year ending with previous month is less than the VAT registration       threshold;
• The owners are practising members of a religious society, whose beliefs prevent the use

of computers;
• Disability of individual, or location of the business, which makes it impractical to use        digital tools; or
• It is subject to insolvency procedures.

If one of these circumstances applies the business will have to contact the VAT helpline to discuss alternative arrangements to submit their VAT figures. A business can’t choose to be exempt. If it is in fact exempt from MTD reporting, it can elect to submit MTD reports using suitable software before the start of the next accounting period.

Deregistration from VAT

Both the draft VAT Notice and the VAT regulations make it clear that a business is drawn into the MTD reporting regime if its annual turnover (which would be subject to VAT) exceeds £85,000. If the business turnover drops below £85,000 the business must continue to make MTD reports until it deregisters from VAT.

Next stage

If you have comments to make on the draft regulations or VAT Notice you can send them to makingtaxdigital.consultations@hmrc.gsi.gov.uk. or post them below and AccountingWEB will include those in its response.
The regulations will be subject to the negative resolution procedure – which means that if no MP, or member of the House of Lords, objects to the draft regulations, they are passed with no debate in Parliament.